Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

Thanks, everybody, for joining us this morning. I'm going to read a quick disclosure, and then we'll start our fireside chat. For important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. This morning, I am delighted to have with us today Kelly King, Chairman and CEO of Truist; and Daryl Bible, CFO. Gentlemen, welcome, and thank you so much for joining us again this morning.

Thanks, Betsy. We're glad to be with you.

Kelly, I'm sad we're doing this via Zoom for our final presentation here at Morgan Stanley's annual financials conference, but I'm hoping maybe we can get you in as a guest speaker, perhaps in the future, just to have one last in-person meeting. Hopefully, that can get done.

I look forward to coming back anytime I'm invited, Betsy.

Okay. That's great. Well, Kelly, you have guided Truist organization from its dual roots at the BB&T side from $196 billion in assets to $510 billion and counting in assets today. What I'm hearing is the integration is going very well. You've got a great, fast-growing footprint with what I hear is a significant amount of in-migration nowadays. So I just want to say congratulations.

Thank you. I appreciate that. It's great to be with you and the Morgan Stanley team. We always enjoy being with you. It's been a great career. And the highlight, of course, is what great work we're doing now with Truist and you're right, things are going great. We've spent a lot of time early on in terms of developing our culture and activating it, embedding it throughout the organization. All that's gone extremely well. We're really beginning to see the positive effects of the synergies that we expected between the 2 organizations. Our conversion is going really, really well. We're excited about a client conversion first quarter of '22. And looking forward to it. Things are looking really smooth now.

So maybe we can talk a little bit about post conversion. I know that is still a little bit ways out. But you're always thinking about the next 3 to 5 years, of course. How are you thinking about the footprint of the organization? And is there a need -- because this is a question that comes up from investors all the time. Is there a need for Truist to go national? You're already there in many commercial businesses. So the question really is, is there a benefit to adding branches outside of the footprint that you have today?

Yes. That's a good question that we think about. And you're right, we are a very strong nationally in a lot of businesses like mortgage and capital markets, investment banking, insurance, national consumer finance. Our LightStream business is one of the very best digital unsecured consumer lending businesses out there. So we basically, basically think about it in terms of the client. In the old days, you tended to think in terms of to build all these branches and they will come. In today's world, you think in terms of meeting the client where the client is. And that's a really big deal. And so the way we have conceptualized it is in what we call T3, where T stands for Technology, Touch and Trust. So ultimately, what we're trying to do is provide the best value proposition. Value is a function of quality relative to price, and quality is a function of that seamless integration between technology and touch in today's world. It was different 20 years ago. So when we think about when we have branches or more digital platform capabilities, we start with the client and we work backwards. And so there will always be need for branches. There's obviously a huge and increasing need for digital capabilities. And it will ebb and flow, but we will be focused on the client. We'll let them guide us in terms of how much investment we need in the touch side versus the digital side.

And then what about white space in your product offering to clients? Is there anything that you're thinking about with regard to potentially payments, which has obviously been a huge topic recently. Capital markets, banking, wealth, there's a broad range there we could discuss, but just wanted to understand where you think the whitespace is today for your organization?

Well, the biggest whitespace, in all honesty, is executing on this big merger we're doing right now because it's -- we're in great markets. We have 2 great companies. We have so many opportunities in terms of leveraging the investments that we're making today. We are in already, in a physical way, 7 of the top 10 expected fast-growing markets in the country. So -- and then with all of our national businesses, we just have an enormous amount of opportunity just doing what we do today. But more specifically to your question, there are opportunities out there. We think payments is a big opportunity for our company. And we think, particularly in the small business space, we really believe there's a great opportunity because we, as you know, we are a community bank now combined with a great national investment bank. And so we can play both sides of the field. And so we really see in the community bank and the small business space tying in payments in terms of merchant-acquired business a really big opportunity. So we're looking at that hard right now. We're staffing up in that area. We continue to invest in insurance. We continue to invest in wealth, a variety of opportunities out there for us.

Okay. And then on the digital side, you were talking about how tech is such a key part of the delivery of the services today. You've been ahead in many ways going back to the days of U app, right? Was that maybe 5 or 6 years ago or so when that was put in place?

Five.

So what's there left to do on digital? Do you feel like you've done everything that's on your list? Or is there something in the future that you're looking to enhance?

Well, Betsy, the way I think about digital is we're just getting started, and we will never be through. Because the consumer preferences are changing with blinding speed, the technological capabilities to meet those increasing preferences are changing really, really rapidly. And I think it's going to be a constant process of technological change. The challenge is to be sure that you keep the touch side alongside the technological side because the truth is, as we all know, from the last 1.5 years, we've been on so many of these webcasts, technology doesn't always work perfectly. And so your clients need it, demand -- it's table stakes, but they also expect to have a high level of trust. They expect to have that seamless integration over to touch when the technology has a blip and there are services that we provide that are more complex and consumers and businesses want to have that human touch. So we think this T3 concept is a leading-edge concept. We think it's what guides us throughout the whole organization. It's pointed starting with the client focus, working backwards in terms of product and service delivery. But the key is you have to be on your toes. You have to be changing on a regular basis. I think about it like almost like a virtual investment cycle where you're constantly pruning off expenses and activities that you did yesterday that are no longer needed or preferred so you can invest and the preferred technological capabilities going forward. So it will be ongoing forever. I don't think it will ever -- in fact, I think it will accelerate going forward. It's going to be fun.

And when you think about the opportunity set to even move forward the digital offering that you have, do you think there's more to do on the consumer side, the commercial side, large corporate? Or is it pretty similar across the spectrum?

It's similar, but different. And the pace is the same, but like on commercial, it's more chunky. It's bigger things, think treasury and investment services and those kinds of more chunky, larger, more complex terms, but still very technologically driven. On the consumer side, it's just a myriad of smaller improvements. Like in the U platform, you're always tweaking and changing sometimes on a daily basis. But here's the key for Truist. You remember when we announced the combination, we said then that we were going to invest heavily in technology and in innovation, and we were going to create an innovation and technology center here in our Truist headquarters in Uptown Charlotte. It will be opening later this year. It's going to be awesome. I can't wait for you to come down and see it, it's like 110,000 square feet. It's going to be a world standard innovation center. But the beauty of it is not the space and what it looks like, although it will be gorgeous. It's the process of bringing your clients in and letting the clients enter what we call the Journey Rooms and through agile development, we work with the clients and say, "What do you want? What do you prefer? Let's develop this together." And they literally, side-by-side with our marketing people, our product people, our technical people, we develop it. They use it, we tweak it. So if you think in the old days, people in backroom would work on a product or service maybe for years. And then finally, we've rolled it out to the consumers and hope it works. Today, we'll know it works because they helped us design them. And so we'll have constant Journey Rooms going on all the time. If you walk into this new center, you'll see clients, you'll see product support people, you'll see outside vendors working with us alongside. It's going to be a really, really different way in terms of thinking about relationship management, which will instill trust with our clients because they will know we're not trying to build a product to sell to them. We're trying to meet their needs.

That sounds very cool. Well, I will say I did spend quite a bit of time -- well, maybe not quite a bit, a little bit of time with some of the folks in your treasury management business on a report we did recently, and it was very interesting digging into what you're doing there and all of the tools that you're building and the capabilities that you have. So congratulations on that.

Yes. Yes, thanks. Our technology people are awesome. They've come up with this patent pending new concept now basically called the Digital Straddle, where, first time, we believe, it's been done, where we are developing the capability of taking the information from the traditional SunTrust and BB&T systems and bringing it forward into a Truist front-facing client offering even before we do the conversion. So we're rolling out already as we speak our digital offering. We've already had 12,000 teammates using some of the Truist offering interfaces. We're getting ready to add a number of clients in that beta test. So we're way down the road in terms of our digital front offering to our clients, which is very exciting, have been very well received.

Okay. Great. All right. We're going to move on to some questions about how the environment is right now today. Just talking a little bit about the health of your borrowers and lending volume opportunities. So when we dig in, first question here is the -- not only the consumers but corporates too have a lot of liquidity. And just want to get a sense from you as to what you see them doing with that liquidity? On the consumer side, how is the stimulus going in terms of the checks that have been spent? What do you think the pace of that is likely to be relative to prior stimulus checks they've gotten in the past? And then on the corporate side, do you think they're going to sit with this higher level of liquidity before they invest? Or will we need to see deposits brought down first before lending volumes kick in? Maybe your thoughts on that would be helpful.

Yes. And I have some pretty good anecdotal feedback because we've been doing, over the last couple of months, what we call our regional visit process. Now we're doing it virtually. We'll start back in July doing it on site, but we've talked to about 250, 300 small and medium-sized business clients over the last 2 months. And I would tell you that optimism is extremely high. Demand for the products and services has been really, really high. They're having supply chain challenges and labor challenges. But overall, the economy on the street, on main street is very, very good. Consumer activity is very strong. Debit card activity is up 20-plus percent. Credit card activity is really increasing. So consumers are beginning to spend, but they still have a lot of liquidity. And so our deposits are up like 20%. And we believe that on the corporate side and on the consumer side, a lot of that liquidity is going to stick. Traditionally, if there was an inflow of funds, you would expect people to use all these funds before they started borrowing. But remember, people have now gone through 2 major shocks in a 10-year period, 2008 and '09 was a giant scare-me shock. Now we've just been through one even worse than that because we include physical health concerns. And I believe, Betsy, that you're going to see, for at least a number of years, maybe forever, but at least for a number of years, you're going to see a more conservative consumer and business population. I believe they realized that they are safer, they're able to plan for their families and their businesses better with more liquidity. And so you will see, in my view, them hold on to much more liquidity than you might expect while they go ahead and start borrowing. And remember, liquidity is cheap today. So they can borrow at extraordinarily low rates and keep that liquidity, have that safety, have that flexibility. And so we're beginning to see that. We're beginning to see green shoots in terms of loans picking up. We think we've hit a pivot point in terms of line utilization on the commercial side. And based on the activity that I'm hearing from our clients and prospects, I personally believe the second half of this year and as we head into '22 will be pretty robust in terms of loan activity.

So you said you hit a pivot point on line utilization. Does that mean it's up from its lows?

Well, it comes and bounces. So like a couple of months it's up, and then it might go back down a month. And so it's bouncing around the bottom. But the trend line is up in terms of utilization.

And give us a sense on your credit box. Where is that now versus pre-COVID?

I would say that with the exception of hospitality and some aspects of CRE, it would be very, very much the same as pre-COVID. Underwriting is normal, credit conditions are pre-COVID-like, still have some strain in those 2 I mentioned. But overall, business is back to normal.

And so one of the questions I get from people as well, should the credit box be even looser than it was pre-COVID. Given the fact that consumers and corporates have so much excess liquidity, is there a case to be made for that?

Not a good case. Some people make the -- some people make that case, but it's a foolish bet in our view. We're relatively conservative, and we underwrite through the cycle. So we would not loosen up our standards now just to get more loan demand. There may be some that would do that. But we believe, in the best interest of the client, it is not healthy to underwrite at a looser level because when you return to more normal, interest rates go up and more normal economic conditions are at play and you underwrote a loan because you needed -- you had more liquidity and you needed your loans out front door and then they can't comply with the long term. It's just not a good scenario. So we underwrite on a normal -- and we had to adjust some during this because this was such an abrupt, dramatic change. We had to make some adjustments in the tightening side. But so far as loosening because of liquidity, we would not do that.

So you are making an assessment for what you think a normal liquidity buffer would be in the clients and basically, you're underwriting to that. So you're not giving them credit for the excess they have right now today, mainly because you see it as transitory.

It's transitory. That's right.

Okay. All right. So now I just wanted to ask a little bit about your sense of opportunities for loan growth over the next year. I'm wondering, as we're thinking through corporate, construction, commercial real estate, resi, et cetera, where do you see the biggest opportunities? Where you'd see an inflection point coming through most strongly? And what do you think will take a little bit longer to pull-through?

Well, clearly, the longer the pull-through will be in the most harmed businesses, hospitality, CRE and so forth. But other than that, broadly, based on feedback we're getting and pipeline we're seeing, virtually every business area is seeing robust increases in demand. And if you think about it, it's not too surprising because we were operating for about 10 years on a kind of steady state, some normalized balance between supply and demand. And then basically, all of a sudden, demand went to 0. And supply was still there, okay? And so now what you're seeing is demand has pent-up for 16 months, and it's now coming back fast. And supply, while it was stable for a while, supply is relatively constrained a bit now because of supply chain issues and some labor shortages. And so you got right now a substantial increase in demand versus supply. So in my view, you're getting ready to see meaningful increases in inflation. Already seeing it -- when I talk to all these businesspeople, everybody says, I don't know where Washington is coming from about no inflation, it's everywhere. And so you will begin to see, in my view, that show up at a national level in the next several months. And interest rates will begin to increase in spite of what you're hearing. That will be good for banking because we operate on a nominal world, and inflation and high interest rates is good for us. It's not necessarily good for the lower end of the socioeconomic part of society because the standard of living goes down when inflation goes up, as you know. So -- but rather than that, on a broad economic sense, we think the economy is going to be pretty robust, probably, for the next 2 or 3 years. The supply chain issues will get worked out. The labor shortages will get worked out. Demand will remain relatively high. It's going to be a pretty good time for banking, in my view, for the next few years.

Okay. Let's move on to fees. Insurance is really a standout for you, obviously, as you all know. And as part of the MOE, I think the goal was to, over time, get the insurance fee revenue contribution to total fees back to where it was at BB&T levels, as you know. So give us a sense as to how you are thinking about executing on that outlook, organic versus inorganic? And how are you positioning that business for growth here?

So we feel really, really good about that business. Organic, as you know has been growing very rapidly for us. Last year, we had meaningful advantage over the peers. First quarter, we were 6.4%. So we see the organic opportunities continuing to be very strong for several reasons. One, the market is hard, and we think will remain a hard market for a good while. The economy is growing, so the base is growing. Within Truist, we have this process we call IRM, or Integrated Relationship Management. It's where we crossover the businesses and meet all of the needs of our clients. That has just really taken off for us. So the organic side of insurance business is going to continue to be very, very strong for as far as we can see right now. And then on the acquisition side, you've seen us through several acquisitions recently. The consolidation opportunity out there is very strong. We have an appetite for continuing to build that business back in terms of the proportionality to our revenue stream, more similar to where it was on the heritage BB&T. We're down to about 10% now. We certainly in the intermediate term would like to see it in the mid-teens. And there's opportunity beyond that in the longer-term sense. And we think we can do that with strong organic growth and strong acquisition opportunities. Remember, we're wholesale and retail. And both offer really good opportunities. We recently announced a retail deal, a wholesale deal. And there are many opportunities in both spaces as we go forward. So it's a really good business. It's a great diversification. It's capital-friendly and it's CCAR-friendly, and we really like it.

And your medium term is, what, like a 3-year plus/minus type of time frame?

Yes, I'd say more like 5 to get to that kind of mid- teen -- yes, more like 5, yes.

Okay. Got it. Let's look at mortgage. It's another line item that it's obviously not as big as insurance, but it can move around a bit. And I wanted to understand how you're thinking about that line item as we look forward. We've got low rates right now, which should be helping mortgage, but then you've got the gain on sale volatility coming through. So give us a sense as to what you're doing to drive that line higher over time.

So mortgage is obviously a great business long term, and we have huge opportunities to continue to expand it nationally because we do retail through our footprint. We do correspondent banking nationally. And we like both, and we very aggressively pursue both because it's just a really good long-term source of business. And to be honest, it's one of the most stable demanded products that we can offer to our consumers. Housing is still the #1 goal for families in our country and so it's just a great product. What we're doing now is adjusting between the huge spike up in volume in '20 because of extremely low rates, extreme increase in refis. And now that is, of course, is subsiding. We got really -- like everybody, we really got tax in terms of capacity when that volume spike way up. So we are making modifications in terms of our business, in terms of learning new underwriting processes and servicing processes. We're staffing up in terms of producers and underwriters. And we tweak from time to time, the relationship between our retail and our correspondent based on our capacity on the retail side. So it's softening now simply because of the refi, the purchase, which is really desirable from a long-term point of view because you have that direct relationship with a new client, and we like that. So I think the long term, it's volatile right now because of the rate gyrations. It will stabilize. It will continue to grow rapidly. There's still a huge demand and preference for homeownership. It seems to be increasing because of COVID. And particularly in our markets, I mean, people love the Mid-Atlantic and Southeast, the nature of the markets, the climate and conditions, tax structures. We're seeing, as we have for our whole career, but there seems to be an increasing level of in-migration into our markets. So we're in a great market positioning, and we have great products in mortgage. So it will be strong for a long time.

Okay. Great. Maybe we could flip to just the topic of operating leverage. The integration over the next 2 years should drive up operating leverage. And I know you have a plan to get to the low 50s range in the medium term. I'm wondering what you see are the key drivers to get there beyond, maybe some of the branch work that you're going to be doing and the MOE integration, is that the entirety of the path to the low 50s? Or is there anything else there that you're thinking about?

No. It's this thing called revenue that we focus on. So we -- we really think -- Betsy, we have just enormous revenue opportunity. We are just scratching the surface in terms of cross-selling BB&T Insurance services over to SunTrust, SunTrust's capital markets and investment banking business over to -- so our Truist offering is broad. It's deep. And yet it's underserving. So we haven't had the time yet. But we have a really advanced concept, this IRM concept, which is well-established. Our new Truist teammates from the heritage SunTrust side love it. Bill Rogers loves to say, I don't totally understand it yet, but I know I want a lot of it really. So it's really -- it's just a great concept, but it's a cultural imperative to meet all of our clients' needs all of the time. And so for example, today, if we look at the corporate investment banking book, we're only penetrating with insurance about 10% of that book. I mean we should be at 50% before we even begin to think about optimizing. So we have huge opportunities there. Cross-selling over the capital markets, capabilities into the heritage BB&T book is just incredible. I mean our clients love it because -- think about it, they bank with us, but if they had a capital market need, largely, they went to somebody else. Now we are a one-stop shop. And they love it. Our teammates love supporting each other, and it's just kind of fun. And so revenues are looking really, really good. I'm going to let Daryl talk about the expense side of that because, I'm all control the revenue, he's more control the expense.

Okay. Thanks, Kelly. On the expense side, we talk about our expense savings in the 5 buckets, and we show that on our earnings report and the progress we're making there. That said, we have several hundred projects going on in this company, both basically driving efficiency or removing shadow organizations and kind of redoing what we've put together in '19, we're kind of regoing through what we look now as we move forward to it. So we definitely are going to drive the expense numbers. We're going to hit the targets that we set out in '19, the $1 billion net, $1.6 billion. I believe we're going to get more savings than that. But to be honest with you, we have so many opportunities in this company to make more investments and to help drive and serve our clients and communities. That's the direction, I think, we're looking at right now. But as far as the cost savings goes, we will have our onetime merger costs and incremental MOE expenses start to fall off in '22 versus where they are right now so that you will see the GAAP number and the adjusted number come closer together, such that when we start in '23, that adjusted number will be our run rate for expenses as we move forward.

And Betsy, I would just add one thing that's really important. You remember several years ago, I think it was at your conference, I put up a slide, and I called it "disrupt or die." I modified it to "disrupt to thrive" but that concept is just as active and important today as it was 3, 4 years ago. Because any business in any industry, but in our business, any business who's going to survive and thrive is going to be constantly reconceptualizing its business, pruning off the old, reinvesting in the new. And when you do that, it becomes huge efficiency opportunity because you're almost always reinvesting in more efficient ways of doing things. So it's a very healthy natural fun process for a company once you get your people to be excited about change.

Okay. Well, if you can patent that, you could take it everywhere in your next phase, Kelly. I guess the other question, Daryl, while we have you, is just how you're thinking about the outlook for NIM, and no other guidance points for 2Q '21? I don't know if there's any updates that you have that you want to share with us?

Yes. On a good news front, I would say our revenue guidance that we gave is intact. The mix is a little bit different, driven by really successful growth in our insurance businesses and CIG, our fee businesses really are outperforming right now in a lot of areas. And we continue to hire more talent in both of those businesses, which is very positive. If you look at the lending side, as Kelly said, we're going to be down a little bit in loans this year versus the prior quarter. And our hope is that kind of bottoms out and kind of starts to grow as we get into the second part of '21. As far as the net interest margin goes, our core margins in the 260s, plus or minus. But the thing that really makes it more challenging to forecast that is how much more liquidity is going to come into the system. We continue to have robust deposit growth again this quarter. And we've deployed that into securities. We also have balances at the Fed between $15 billion and $20 billion. So that kind of dilutes down the margin. The best scenario for us is that as loan demand picks up, as our PPP payoffs kind of subside, as revolver utilization starts to increase, that we can change the mix from a security yield to a loan yield, and that will help stabilize and actually grow the core margin as we move forward.

Okay. Got it. I guess just in the last minute or so we have left, Kelly, as you move to Executive Chairman, what are the top 3 nuggets of advice that you have for the organization?

Well, I would -- I don't know if I would use the word advice because I can tell you that Bill Rogers and I absolutely agree and have from day 1 on these 3 points, but these would be the most important points to focus on. Culture drives performance, always has, always will. And so you have to keep a really strong focus on developing at a deep level culture in the organization to optimize our performance. The second is leadership matters. There's no facet of society that cannot be improved by federal leadership. That's through outside companies, that's through inside companies. We are really blessed at Truist because we have a world-class -- I think, the world's best leadership institute for teaching leadership for our teammates, for teaching for our clients, teaching outside organizations that need help in the community. So leadership needs to be a really top level of focus. And then this may sound strange to you, but I think it's the most important and that is to focus on the happiness of our teammates. Ultimately, an organization optimizes when the teammates find that they can have success and happiness simultaneously inside the workplace and not have to work for a paycheck and go outside to try to find some sense of happiness. They can come to work, be successful, achieve something, have a sense of fulfillment and be happy. That's our goal at Truist. That's what we're accomplishing. And that's the most important thing for our company long term.

All right. Well, great. With that, thank you so much for joining us this morning. Really appreciate your contribution to our conference, and we look forward to meeting in person.

Thanks, Betsy. Have a good day. Good to see you.

Bye.

All right. Thank you. And now we'll move on to the next session.